China staves off bond default for steel firm

Two Chinese government agencies have stepped in to push back a bond payment deadline for Hong Kong-based Sinosteel Trading Co..

The bond payments were originally due Oct. 20, 2015, by the trading firm, which is a subsidiary of Chinese state-owned enterprise (SOE) Sinosteel Corp.

In early and mid-October, a potential lack of intervention was interpreted as a signal of the willingness of the Chinese government and banks to let SOEs connected to the ailing iron and steel sector suffer the consequences of poor investments. But Monday, Oct. 19, China’s National Development and Reform Commission (NDRC) and the State-owned Assets Supervision and Administration Commission stepped in to pre-empt the potential default and push the deadline back to Nov. 16, 2015.

According to a report in the Hong Kong-based South China Morning Post, NDRC representatives met wth Sinosteel debt holders on Oct 16, where they were “asked not to redeem the bonds, and then told the redemption date would be delayed by a month to Nov. 16.”

An Oct. 14 online article by Bloomberg reported that bondholders had an option to require Sinosteel to make a $315 million payment Oct. 20. A bond analyst at China Merchants Securities quoted by Bloomberg said Sinosteel’s “default risks are very high,” and that the deadline may become a test of Chinese Premier Li Keqiang’s willingness to allow more defaults to weed out weaker companies.

Sinosteel Trading is a subsidiary of Sinosteel Corp. On a website of an Australian-based Sinosteel subsidiary, the company is described as “a central enterprise under the administration of the State-Owned-Asset Supervision and Administration Commission and one of China’s largest and most influential companies.”

On its own website, the company refers to itself as consisting of 65 “technology companies in prospecting, mineral, thermal, environmental protection, refractories, metal products, engineering design and other fields.”

The intervention continues a pattern of China taking measures to support SOEs such as Sinosteel.

In the private sector, Haixin Iron and Steel Group, which is described by China’s Xinhua news agency as “the largest private iron and steel enterprise in Shanxi Province,” began bankruptcy reorganization procedures in late 2014.

However, in September 2015 the company announced a reorganization that results in it essentially being acquired by a steelmaker backed by the government of Jilin Province while the provincial SOE invests more than $390 million in Haixin Iron and Steel.

In the Sinosteel situation, an investment manager quoted by Bloomberg said a default on the bonds would make it “more difficult for steel companies to raise money,” potentially dealing “a heavy to blow to the whole [Chinese] steel industry.”

Considering that the rest of the world sees China’s steel overcapacity as a fundamental problem, many steel sector workers and executives outside of China are probably hoping the Nov. 16 deadline may yet bring that about.